Eurozone: Broad-Based Slow Growth Ahead Of Corona Disruptions

Irish data distorted eurozone GDP figures substantially in 2019, but if we exclude Ireland, the numbers show broad-based sluggishness at the end of 2019.

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Eurozone GDP growth was confirmed at just 0.1% for the fourth quarter of 2019, indicating the economy grew at the slowest pace possible even before the coronavirus disruptions.

Growth was brought down significantly by net exports due to the surge in imports, while investments surged. These figures are largely distorted by Irish GDP figures, that are dominated by accounting activities by multinationals (when profits are booked in Ireland, this increases intellectual property investment and imports). Irish investment increased by 123.2% and imports by 34% in 4Q.

These swings have been so substantial in 2019 that the expenditure components for the eurozone have become almost meaningless.

If we take Ireland out of the data, we find growth was actually even slightly weaker. Growth declines from 0.11 to 0.06%, mainly because of a much slower growth rate of investment, which falls from 4.2% QoQ growth to 0.04%, down from 0.1% in the third quarter as opposed to a marked increase when looking at the figures that include Ireland.

This makes more sense given the uncertainty that eurozone businesses faced at the end of last year including trade disruptions and a domestic industrial recession.

Eurozone investment has been on a wild ride,

 But excluding Ireland reveals a picture that makes much more sense

Source: Eurostat, ING Research

The net trade data also show a more balanced picture without Ireland. The sharp negative contribution of trade to GDP growth in 4Q disappears when leaving Ireland out and a small positive emerges: 0.1% instead of -0.8%. The consumption and government expenditure contributions have not been impacted by Irish fluctuations as they are not impacted by multinational accounting activity.

Fourth-quarter growth of GDP components without Ireland shows underlying sluggishness

Source: Eurostat, ING Research

This means that the overall growth picture was one of general sluggishness in 4Q.

While some green shoots were apparent on the back of calmer political environment around trade, domestic demand slowed while net exports improved only slightly. Current Covid-19 developments obviously trump the green shoots and have likely tipped GDP growth into a decline in the first quarter.